401K? Pension? What Does It All Mean?

Have you ever wanted to better understand your retirement? What is a 401K? What is a Pension? What is a defined benefit plan? What is defined contribution? Why do I care? Does it affect me? These are some of the things we address to make sure that you know more. It is after all, going to affect the rest of your life.

Transcript

Chris Holling: 0:01

What concert costs just 45 cents?

Sean Cooper: 0:06

I don't know what

Chris Holling: 0:07

it's 50 cent featuring Nickelback.

Sean Cooper: 0:16

wow

Chris Holling: 0:19

these are these are like bad bad. What? What time?

Sean Cooper: 0:23

But they're like modern bad?

Chris Holling: 0:26

modern bad

Sean Cooper: 0:27

Yeah.

Chris Holling: 0:28

It's inappropriate to make a dad joke if you're not a dad. It's a foe PA. Okay. Back on track.

Sean Cooper: 1:03

Okay. Temporarily, right

Chris Holling: 1:06

Okay. temporarily on track. Welcome, ladies and gentlemen, boys and girls, people of all ages that are probably, within listening ages who own an iPhone, more likely than not to another episode of the truth about investing back to basics. My name is Chris Holling.

Sean Cooper: 1:30

And I'm Sean Cooper.

Chris Holling: 1:32

And even though this is for all ages, we kind of want to talk about different types of retirement plans. Because like, like we've addressed before, especially in the time that I just didn't know a whole lot about money,

Sean Cooper: 1:48

but different types of accounts in general, not just

Chris Holling: 1:50

right. different

Sean Cooper: 1:51

Different accounts in general. Yes.

Chris Holling: 1:53

Right. Right. I know that, at least previously, for me that the reason I mentioned retirement accounts specifically and why because we'll hit on that has been a series of circumstances where they go sit down, hey, this is your new plan. Here are your benefits. And here's your retirement plan. And I go cool, what does that mean? And never really got outside of that. And I think there there are still some people that just kind of go Yeah, I've got this plan. I've got this 401k. And I know that it's got three letters and a number. And that's about it. And that's that's okay, cuz that's the kind of stuff that we want to talk about talking about some of the differences. And if we have time, some of the some of the I don't know, not if we have time, like what are the benefits to each one? Really, I'm sure we'll touch on that. So I know that before we get started, we would like to talk about the difference between qualified accounts and non qualified accounts.

Sean Cooper: 2:52

Yes.

Chris Holling: 2:54

Well, by all means, Mr. Sean, sir, what is a qualified account, what is a non qualified account.

Sean Cooper: 3:05

So a non qualified account is basically going to be any of your individual or joint accounts that you can open up that are not going to have any type of tax benefit associated with them, they're also not going to have any restrictions as to how much you can deposit or when you can withdraw funds. So all of your retirement accounts, on the other hand, are going to be qualified accounts they have some sort of tax benefit attached to them. But they also have lots of restrictions in terms of how much money you can put in, and when you can pull that money out. And the reason we want to talk about that is because that's kind of the really broad blanket information, and then we can get into the, you know, drill down into the, the specific types of accounts from there.

Chris Holling: 3:50

So just just clarify, when we're talking about qualified accounts, we're talking more about the the ones that you would have access to like we addressed in our savings episode, where you have access to, to money where you need it, and

Sean Cooper: 4:06

no, that'd be non qualified.

Chris Holling: 4:08

Oh, shoot, sorry, backwards. Okay. So the non qualified account would be the one that you have a lot more easy access to it

Sean Cooper: 4:16

correct

Chris Holling: 4:17

and a little bit more liquidity to be able to mess with where if you're trying to coordinate how things want to go, then that that's what that is where your non qualified is going to be your retirement accounts. Right. Right. Right.

Sean Cooper: 4:31

You're qualified is your retirement accounts.

Chris Holling: 4:33

Oh my god.

Sean Cooper: 4:34

Right. So if you have, say, for example, you've saved up X amount for a deductible and you don't want it just sitting in a savings account earning next to nothing you decide you want to invest it. That's gonna go into a non qualified account, typically

Chris Holling: 4:50

non qualified,

Sean Cooper: 4:51

non qualified,

Chris Holling: 4:52

non qualified,

Sean Cooper: 4:53

non qualified, no tax benefits

Chris Holling: 4:55

non qualified,

Sean Cooper: 4:58

no restrictions on the deposits and withdrawals. Now, the only restriction you're gonna have in terms of withdrawing from a non qualified account is the timeframe it takes to actually, you know, liquidate investments and transfer the money back out to your, your checking or savings account. So, but those are individual accounts and joint accounts. Predominantly.

Chris Holling: 5:21

I was just seeing if I could get you to say non qualified again,

Sean Cooper: 5:24

non qualified,

Chris Holling: 5:25

non qualified. Okay, cool. Well, can you can you give me an example of a non qualified account? Just since we're, we're on the topic, what what would a non qualified account be? Or what's what's one of the most common ones that gets used? How's that

Sean Cooper: 5:44

an individual account

Chris Holling: 5:46

Okay. And that

Sean Cooper: 5:48

Technically speaking your savings account, you know, you open up a savings account or a money market account, or even a checking account at a bank. Those are non qualified accounts, either,

Chris Holling: 5:59

but if I

Sean Cooper: 5:59

Either individual or joint,

Chris Holling: 6:01

but if I'm wanting to make more money than I would be in my savings account, but I want the access to it. And I said, Hey, Sean, I want to make more money than I'm making my savings account, as it's sitting there, but I need it to be a non qualified account,

Sean Cooper: 6:17

yes,

Chris Holling: 6:19

then

Sean Cooper: 6:20

still gonna be an individual or a joint account, there's really not another, you know, you get into retirement accounts, they have a bunch of different names and stuff like that, that you have to keep track of on the non qualified side, it's an individual account or a joint account. And those are kind of your options. You know, deciding where you want to invest is a very different story in terms of the the company you want to work with. And then the the, how you want to invest those funds, you know, that's another, that's multiple podcasts.

Chris Holling: 6:53

Right? But I guess what I'm getting at is I'm not going to go to my bank and go, I want an individual account

Sean Cooper: 6:58

no not typically

Chris Holling: 6:59

They're going to say, What are you talking about?

Sean Cooper: 7:01

Yeah, so you'd want to that's where you'd either if you want to utilize someone services to help you with the investment side of it, then you'd be dealing with either you know, a financial advisor, or an investment advisor like myself, if you want to do it yourself, you can go directly with ETrade Schwab, TD Ameritrade or TD Ameritrade, there's a number of other ones out there that you can utilize where you set up an account online and transfer some funds in and then you can start placing your trades.

Chris Holling: 7:33

Okay, and Okay, yeah, that's fair, because then you just contact that place and say, This is what I'm looking for. And then they'll help you set that up, whatever that is.

Sean Cooper: 7:43

Right? Yeah. I mean, you can you can do it all online, you don't even have to, in many cases, if you don't end up even talking to anybody. And those online ones, they often they they're trying to make it as do it yourself as possible. They don't want the additional expense of trying to provide lots of support.

Chris Holling: 8:08

Sure. Okay. That makes sense. All right. Well, now we know what a non qualified account is like.

Sean Cooper: 8:15

Yes.

Chris Holling: 8:16

So let's talk about qualified

Sean Cooper: 8:19

types.

Chris Holling: 8:20

We we've got. And these these are just the ones I know off the top of my head that I feel like are the most common, at least in in my line of work, is there's a 401k, a 401a and a pension has are the most common ones that I come across, personally. And the 401a, is a different version of the 401k. But it is a nonprofit version of it. And it allows some more flexibility and some more options than the 401k might offer. And pension is a little bit differently. But I also don't want to just completely dive into one or the other just yet, unless there are others that you want to address. First, those are just the ones that I'm more familiar with than anything.

Sean Cooper: 9:12

First off, there's the accounts that you can invest in yourself, or you can do yourself that does not require any association with the company, and those would be your IRAs, which are individual retirement agreements. And then you have the entire slew of company related retirement accounts and those can be broken down into two categories. The first would be defined contribution and the second would be defined benefit.

Chris Holling: 9:42

What is a defined benefit versus a defined contribution?

Sean Cooper: 9:45

So a defined benefit plan is exactly what it sounds like. They are defining the benefit you will receive once you retire. defined contribution is the exact opposite where the benefit that you receive is undefined and is more or less up to you and your return on investment, but they will specify exactly what they're going to contribute to the plan. So the easy way of kind of, I mean, it's not 100%. But the easy way of looking at that, and what people most people recognize defined benefit, as would be your pension.

Chris Holling: 10:23

Okay, that makes sense. Because you know that you're going to hit a point where I have accrued X amount of time, and whatever the agreement is, and then now you are going to get whatever out as a benefit, for contributing for that long. And that's why it's a defined benefit,

Sean Cooper: 10:38

exactly the company is said that you work this long, based on your last, you know, five years of employment or whatever, we average out that income, or that your income levels, and you're going to get paid out an x percentage of that for the rest of your life with some kind of adjustment too for inflation, or what have you. They're specifying exactly what the benefit is going to be the company is then on the hook to provide that benefit you as the employee, you know, you're gonna make some contribution to it as well, or they rather they're gonna take it out of your check a percentage of it, and then they're gonna contribute to it as well. But you personally don't really care what the the return on investment is how they invest those funds, all you care about is that the company is on the hook for providing that benefit that they have promised you.

Chris Holling: 11:34

Right. So if, if I'm contributing, whatever, let's, let's say, I'm contributing a certain amount of money per month. And I do that for years. And then at the end of it, I know I'm going to get a percentage of my, my overall salary, that's pretty common for a pension, depending on how many years you work, you get a percentage of, of what your salary was, depending on if it's your biggest year, or your final salary, or whatever the case may be.

Sean Cooper: 12:11

Right

Chris Holling: 12:12

And if that amount, is, what am I trying to say, they are going to take the money that you were contributing, and they are going to invest it and they are going to utilize the money that they invest, to pay for those pensions. And so the more people that get involved in it, are the more capable that they are to pay those out down the road. Right,

Sean Cooper: 12:40

provided they have people continuing to pay

Chris Holling: 12:44

right

Sean Cooper: 12:45

into it. I mean, it works, it works like Social Security, that it has to be well managed from the employer standpoint, in that they want to invest it wisely and make sure there's enough funds, they have to make sure that they've taken enough funds from you and deposited enough funds on their end to to have the funds available. They're taking on all the risk. If the funds dry up, the company is still on the hook for paying you what they promised.

Chris Holling: 13:15

Right?

Sean Cooper: 13:16

So from the employee standpoint, it's great in that you have a guaranteed retirement benefit. And so even if you live well beyond your life expectancy, you're still supposed to get that that payment. So that's the advantage to it. The biggest disadvantage to a pension is you have no control over it, there's no there's no upside potential, you can't change your investments to try to make it more aggressive and try to boost the return and try to get more out of it. It's set in stone. I mean, there's there's really nothing to change about it.

Chris Holling: 13:53

Sure. And that. That makes complete sense.

Sean Cooper: 13:58

Most companies have switched. So there's, there's one other defined common defined benefit plan. And that is a they basically define a lump sum that you'll get at the end. So they're not going to pay you X amount on a of your income on an annual basis. They're just going to say, hey, when you hit this age and you retire, we guarantee you'll have this much in your account. What you do from it there from there on out is your responsibility. We're done. So it's still defined benefit. But it's not the the guaranteed pension over your life, your lifetime.

Chris Holling: 14:38

Gotcha. I haven't heard of that before. Is there a Is there a common title that comes with it like 401K

Sean Cooper: 14:44

cash balance plan, typically

Chris Holling: 14:46

cash balance plan. Never heard of that before?

Sean Cooper: 14:49

Most people haven't.

Chris Holling: 14:51

Interesting,

Sean Cooper: 14:51

it's not real common. There are instances where it makes a lot of sense, especially for business owners, but it's not a super common one. In fact, even a pension really isn't that common anymore. Most employees are going away from it in favor of the defined contribution plan because they don't want to be on the hook for your entire life. They'd they'd rather say, Okay, we'll contribute x percentage of your income to this plan. That's the defined contribution. What you do with it is your responsibility.

Chris Holling: 15:23

Sure. That makes sense. Okay, well, then let's let's talk about defined contribution, let's talk about the thing that it's all starting to kind of be more common with be transitioning into then.

Sean Cooper: 15:36

Yeah, so I mean, that's kind of what we touched on there briefly, it's really exactly what it sounds, they are defining how much they are going to put in. So typical match might be something like 100%, up to 3% of your income. So if you put 1% of your income in, they'll match 1%, if you put 3% of your income in, they'll match 3%, if you put 5% of your income in, they're still going to match just the 3%. Another that you might see is like a tear will there where they will do 100%, up to 2%, and then they'll do 50%, up to 4%. So they ultimately end up with the same 3% match, but you have to do 4% on your own in order to get the 3% match. There's all sorts of things, they have lots of control over how they can kind of create the match, but it's still a defined contribution plan. And then oftentimes, they'll they'll tack on some kind of profit sharing plan on top of it in conjunction with it. But there's lots of versions of it. Like you were talking about the 401k which there's a traditional 401k and a Roth 401k 403b 457.

Chris Holling: 17:00

b,

Sean Cooper: 17:00

yeah, 401A, they're all versions of basically the same thing. It's just a matter of whether or not it's a a for profit company or not for profit company, and if it's government or private institutions, so

Chris Holling: 17:18

Sure, well, and and it's something that it's it's worth noting that they aren't all the same either. And again, because they're, they're the ones that I'm familiar with, I know that when you're looking at a 401k versus a 401a, it's the difference between one that is a a straight defined contribution, and one that's a defined contribution. The 401a, is a defined contribution that's built on a nonprofit organization. And it the reason I started digging into this a little bit was somebody was asking me about it. And one of the biggest things that I noticed that was a difference, and I'd have to go look to see what the exact number was. But the 401k if you have a 401k, and the employer that you're working for is matching, the contribution that you're placing in there, they can only match up to a certain amount. And I want to say it's 12,000 ish a year,

Sean Cooper: 18:15

I think you're thinking of a different plan.

Chris Holling: 18:20

Well, the reason I mentioned that is because I know that the 401A in itself matches a significantly larger amount, up to 56,000 or so of the contribution according to 2020 dates, I want to say

Sean Cooper: 18:35

that would be the same for a 401K.

Chris Holling: 18:40

Okay. Interesting. Yeah, I don't then here. I don't I don't know anything about the 401K and a 401a

Sean Cooper: 18:49

No,

Chris Holling: 18:50

How's that

Sean Cooper: 18:50

one of the things you know, one of the things you mentioned sounded more like a simple, which is a savings incentive match plan for employees, that has very different contribution limits than a 401k or 401A. So So I guess, if we jump into this 401k is the most common, you know, you're talking about for profit, non government entities. And the as an employee, your maximum contribution in 2020 and 2021, I believe as well is 19,500 unless you're over the age of 50, in which case you can contribute another 6500 which would bring you up to a total of 26,000 the match the employer can can they can set the match. Now if they want to meet certain criteria to avoid top heavy issues and things of that nature. Then there are some restrictions but for the most part, they can set the match that they want to do and then with their profit sharing They have even more flexibility, the total contribution that can be made between you as an employee, and your employer in 2020, is 57,000, plus the other 6500, if you're over age 50. So it's a pretty substantial amount that can be contributed. And typically, the way that would be done is you as the employee make the your contribution, the employer does a match, and then they kick in a profit sharing. Because typically, you're not going to get there just with the your contribution plus the match, because most matches aren't significant enough to hit. They're not doing a 200% match, which I guess technically, you'd need 192% match to, to cap out, realistically, but that's almost unheard of.

Chris Holling: 20:48

So we're looking at things like a 401k versus a 401A, then one is going to be a nonprofit build versus the other one, the 401k is going to be a profit base. What what are the differences between those two? Are? Are there any differences or is it is that more for the employer to keep track of then

Sean Cooper: 21:08

there are some, you know, nuances between them, but for the most part, you're still going to you're going to be dealing with a employee, contribution limit of 19,500, for 2020 and 2021. And then a total contribution limits, that'd be the employee contribution plus the employer contribution of 57,000. Now, if you're over age 50, you have a catch up contribution of another 6500, that would increase both of those caps. So the 19,500 jumps to 26. And then the 57 jumps to 63500. Okay, some of those nonprofits that you're talking about. So if you go to like a 403B, plan 457B, I think you mentioned 401,a, some of those have some nuances that where they have some some different contribution or different ketchup rules that may apply depending on years of service or years until retirement, but then we'd be really getting into the weeds at that point.

Chris Holling: 22:12

Right. Right. And we're just we're just covering the the general basis of, of what we're looking at. So we don't have to worry about that too. Too much.

Sean Cooper: 22:19

Right.

Chris Holling: 22:21

So when we're looking at our defined contributions, that's when you're looking at the different levels of what you are comfortable with, you are looking at the there's usually an amount that you will be contributing and whatever they are okay with matching what whatever the agreement is to match. And then, at that point, are most 401 K, just because that's the most common or most 401 K's something that you can address with the people that are running the 401k as a, I would like to be more aggressive, or I would like to be less aggressive? Or is that kind of at the whims of whatever place runs your 401k?

Sean Cooper: 23:04

Yeah, so yes, and no, in that regard. And first, I wanted to mention that in in terms of your how much you contribute, because you briefly touched on that. As a general rule, obviously, your financial situation needs to be taken into account. But as a general rule, typically you want to contribute at least enough to take advantage of the match that's your best return on investment is that match right there, you can't get that in the market. So you know, typically take advantage of that, in terms of how you in Yeah, in terms of how you invest the funds and how aggressive you are. Typically, you can control it to an extent most 401 K's are going to have very limited investment options. So they might have, you know, 10, 15, maybe 20 different funds available to you. Most of them are going to be target date funds or retirement date funds that are kind of designed to be set it and forget it you you know, you say you're gonna retire in 2040 you dump your money into the 2040 retirement date fund and they manage it for you. But then they'll have a variety of mostly domestic options. So domestic equities, some domestic bonds, they might have some international options, they're not going to have much in the way of alternative investments for diversification purposes. So you can choose to direct your funds within the scope of the funds that they have available to you. So when I say you have 20 funds within your 401k that might sound like a lot but when you consider There are over 10,000 different mutual funds and easily that many exchange traded funds and, you know, 1000s of different individual stocks. 20 funds isn't really a whole lot.

Chris Holling: 24:53

No kidding 10s of 1000s I had no idea.

Sean Cooper: 24:55

Yeah, they're well over 10,000 mutual funds available.

Chris Holling: 25:00

Okay. Well, I mean, that's that's a relatively fair explanation between when we're looking at the qualified versus non qualified. And we've got the defined benefit versus defined contribution.

Sean Cooper: 25:14

Yep.

Chris Holling: 25:15

Right. And those are pretty broad strokes. As far as just understanding what those are. Is there. Another thing that you want to touch on before we kind of move on? Is there another?

Sean Cooper: 25:31

Yes. So the other big thing you really want to understand with these define or sorry, the qualified plans is the restrictions. I mentioned that before, when we were talking about qualified versus non qualified, qualified plans, your retirement accounts, they're going to have limits on how much you can contribute, which we've touched on a little bit. possibly even more importantly than that is they are going to have limits on when you can access those funds. So for the most part,

Chris Holling: 25:59

oh,

Sean Cooper: 26:00

that's age 59 and a half, you cannot pull money out of those accounts until you're age 59 and a half, or rather, you you can but you're gonna be hit with a penalty. So when you pull money out of your retirement accounts, assuming their traditional not Roth, you're going to be taxed, it's going to be taxed at your income tax bracket. If you pull it out, prior to age 59 and a half, you're going to be hit with an additional 10% tax penalty.

Chris Holling: 26:33

Oh, wow.

Sean Cooper: 26:34

So 10% of everything you pull out, is going to be hit with an is going to be taxed. Or rather, every 10% of everything you pull out, you're going to have to be eliminated as taxes basically. So you pull out 100, Grand 10 grand, that's going to be going to be wiped out by the penalty, then you're also going to pay your income tax bracket on top of that.

Chris Holling: 27:03

Geez. Okay. That's important to keep in mind.

Sean Cooper: 27:07

Yeah, definitely something to keep in mind, the whole point of these retirement accounts, though, and the reason they put those restrictions is they are trying to incentivize investing for retirement, and they don't want you to pull out early out of those. And that's why they're giving the tax benefits that they are. And when I say tax benefits, most of these qualified accounts, are going to provide a tax deduction in the year that you make the contribution, so if you made you know, $100,000, and you put$10,000 into a retirement plan, a qual, not a Roth, one of the traditional retirement plans, that's gonna reduce your taxable income by that $10,000. So now you're only paying taxes on the 90,000.

Chris Holling: 28:00

Right?

Sean Cooper: 28:01

Additionally, it's gonna grow tax deferred, so you're not paying taxes as it grows, as you realize capital gains and losses. It but it is all taxable when you pull it out.

Chris Holling: 28:12

Which is why it's taxable when it's pulled out because you are getting a tax break along the way.

Sean Cooper: 28:16

Yeah, you haven't paid taxes on any of it. At that point, the Roth is the exact opposite. So and I can

Chris Holling: 28:24

Right because

Sean Cooper: 28:25

I can jump into that if you want, but we kind of ended up there in a roundabout way.

Chris Holling: 28:31

That's, that's what we're good at. So when you're looking at Roth, a Roth IRA, that you you said earlier, but

Sean Cooper: 28:41

or Roth 401K,

Chris Holling: 28:43

or Roth 401K, I was, I was just gonna tell you what IRA, have you tell us what IRA stood for God English is not my strong suit today.

Sean Cooper: 28:54

Well, I mean, most of this is all IRS jargon any way. So it's not really English.

Chris Holling: 29:02

It's true. A bunch of nerds that the IRS I'll take another stab at them. I don't care.

Sean Cooper: 29:08

Yeah, it's a IRA is Individual Retirement agreement.

Chris Holling: 29:13

Okay. And that's something that happens because it's individual. It happens. Post taxes from your income, because it's usually something that you are handling on your own with your cash in hand.

Sean Cooper: 29:26

Well are you talking about a traditional IRA or Roth IRA?

Chris Holling: 29:30

Well, I don't know, Sean. I don't know anything. I'm here to learn. I'm here to ask the questions. You know, you don't go out to Anderson Cooper and say, Hey, Anderson Cooper, tell us tell us why things are the way that they are. And he goes I you know, I I don't know but let's talk to this guy. The guy that knows everything that's that's what I'm that's what I'm doing, Sean. I I don't know. I don't know anything. I want you to tell me everything you tell me. I don't know. I don't know, I, until this point, I wasn't even sure I can tell you how to spell Roth. So, you know what, what, what? You just go right ahead? What? Yeah.

Sean Cooper: 30:14

Okay, so So first,

Chris Holling: 30:15

what's a Roth?

Sean Cooper: 30:16

We'll get on the the distinction between traditional versus Roth.

Chris Holling: 30:21

Okay.

Sean Cooper: 30:22

Okay. So ignoring the distinction, the IRA versus, you know, 401k, and all the other business retirement accounts. So just traditional versus Roth, traditional, has to do with and Roth has to do with the taxability of the account how they're taxed. We already talked about the traditional, you get a tax deduction in the year you make the contribution, it grows tax deferred, it's all taxable when you withdraw it. Roth is essentially the opposite. When you contribute to a Roth IRA, there is no tax benefit for doing so. So you make 100,000, you put 10,000 into a Roth IRA, you still pay taxes on the full 100,000. no tax benefit. It

Chris Holling: 31:07

Yeah,

Sean Cooper: 31:08

it does.

Chris Holling: 31:08

Yeah. I said that I said that

Sean Cooper: 31:11

you did. It is still grows tax deferred. The big advantage with the Roth is when you withdraw it in retirement. So assuming we're after age 59 and a half, you're not making an early withdrawal. It's all tax free. You've already paid taxes on the the contribution you made initially. So you get to pull it out tax free on the other end.

Chris Holling: 31:37

Now, that's something I didn't know that there is. I've never, I've never tried to pull from my Roth. So that's probably on me. But I did not know that there would be a tax penalty, to pulling from your Roth early on something that you've already paid taxes on. I did not know that.

Sean Cooper: 31:55

Yeah, you can still get hit with the 10% tax penalty if you pull early from a Roth.

Chris Holling: 32:00

Okay, interesting.

Sean Cooper: 32:02

Yep.

Chris Holling: 32:02

Good to know.

Sean Cooper: 32:05

So that's traditional versus Roth. Typically speaking, the deciding between traditional versus Roth depends on your years to retirement, and then also your your income. And then finally, where you see taxes going in the future, which is really more of a projection. So the higher your income is, now, the more likely the traditional is going to be advantageous to try to keep you in a lower income tax bracket. The lower your income, the more likely the Roth is going to be advantageous, the further you are from retirement, again, the more likely the Roth, the closer you are to retirement, typically, the more the more likely that traditional is more beneficial. And then if you think taxes are low now and you see them going up in the future, again, a Roth is going to be more advantageous. Whereas if you think taxes are high now, and they're going to go down in the future than the traditional is going to be more beneficial. All of those are general rules of thumb, and you would actually want to run the calculations for your individual scenario to determine what's going to make the most sense, but that gives you an idea.

Chris Holling: 33:17

Ah, numbers.

Sean Cooper: 33:20

Yep.

Chris Holling: 33:20

Crunchin numbers. Know what I do. I call Sean, Sean,

Sean Cooper: 33:28

you also just open up a drink on the other end there.

Chris Holling: 33:30

I plead the fifth.

Sean Cooper: 33:39

All right. So you you mentioned

Chris Holling: 33:40

Do something

Sean Cooper: 33:40

IRA, versus, you know, all the company retirement accounts, Ira, Individual Retirement agreement, it is individual, it's just just for you, it has no ties to any type of company. It's just yours. And with those, they have very different contribution limits. I want to say 6000? Yeah, 6000, this year, one, an additional 1000. If you're over the age of 50. Those are the contribution limits. The tax deductibility of them also has limits or whether you can even contribute to them have some limits. So if you're covered by a retirement plan at work, and you make over 124,000 as a couple, so if you're filing jointly, you get no tax deduction for contributing to an IRA.

Chris Holling: 34:39

If you make over that amount,

Sean Cooper: 34:40

if you make over that amount, you get no tax deduction for contributing to an IRA. And that's assuming again, your cover you or your spouse's covered by a retirement plan at work between 104K 124000 is kind of a phase out. Basically, you have to make under 104,000 to be able to get a tax deduction for the full contribution limit of six to 7000, if you're single, the those numbers are 65,000 to 75,000. So you'd have to make under 65,000, to get the full deduction for the 6000 to 7000, and then they phase out from 65 to 75. And if you make over 75, you get no tax deduction for contributing at that point.

Chris Holling: 35:22

Okay.

Sean Cooper: 35:23

So,

Chris Holling: 35:23

okay, that makes sense,

Sean Cooper: 35:24

the Roth has something similar. Obviously, there's no tax deduction for contributing to a Roth. So it's not quite the same in that regard. Instead, it actually phases out and then eliminates your ability to contribute to a Roth IRA at all. So for someone filing an individual return, if you make you have to make under 124,000, in order to contribute to a Roth IRA, 124K to 139000, they phase it out. And if you make over 139,000, you cannot contribute to a Roth IRA at all.

Chris Holling: 36:03

Wow,

Sean Cooper: 36:03

yeah. So for joint filers thats 196,000 to 206,000. So if you make over 206,000, you cannot contribute to a Roth IRA.

Chris Holling: 36:14

Hmm, that's interesting. I didn't know that.

Sean Cooper: 36:16

Yep.

Chris Holling: 36:18

Okay, so I just assumed that you'd be able to contribute to it but you'd have to pay the pay pay the penalty or, or just not have the deduction in the process. But I didn't realize that you just wouldn't even qualify,

Sean Cooper: 36:29

well, for Roth, there is no deduction. So in order for them to remove the the the advantage for those people making more money, they make it so you can't do it at all, which is garbage in my opinion. But

Chris Holling: 36:44

well, you can't play nice with others, so you don't get to play at all.

Sean Cooper: 36:47

No, I don't I never claimed that I did

Chris Holling: 36:49

No. I was speaking generally. But if you want to take it personally, that's fine. That's fine. Okay, um, shoot, what was I thinking?

Sean Cooper: 37:01

You were thinking you want to talk more about some of the weird the different retirement accounts that are tied to companies? That's what I

Chris Holling: 37:10

I mean,

Sean Cooper: 37:11

think you were thinking

Chris Holling: 37:12

that it sounds like that's what you want to talk about, is what It sounds like to me

Sean Cooper: 37:16

I do? Yeah.

Chris Holling: 37:20

Okay. Let's, let's talk about a weird thing that's attached to a company, then. what's what's a good example of something weird that's attached to a company I know of a 457b, that we've referenced before in a couple of previous episodes? Is that one that fits your category of weird?

Sean Cooper: 37:39

Yeah, I mean, yeah, it wasn't what I was going to talk about. But yes.

Chris Holling: 37:43

Okay.

Sean Cooper: 37:44

Yeah, I kind of lumped the 457 and the 403, B in the 401, a and the 401 K's altogether, because they're they're similar in a lot of regards. And then they have their own weird quirks that we that we mentioned, like, for example, the way you wanted the 457 B. So

Chris Holling: 38:06

that's what I have. That's what Yeah, so tell tell me about my life.

Sean Cooper: 38:11

If permitted by the plan, it allows a participant for three years prior to the normal retirement age to contribute the lesser of twice the annual limit. So that'd be 39,000. Because 19,500, double that, or go ahead,

Chris Holling: 38:29

wait, double the 39 or 39 is the double amount

Sean Cooper: 38:32

39 is the double the amount,

Chris Holling: 38:34

okay?

Sean Cooper: 38:36

Or the basic annual limit plus the amount of the basic limit not used in prior years.

Chris Holling: 38:45

Okay.

Sean Cooper: 38:46

Again, IRS jargon,

Chris Holling: 38:49

right? nerds.

Sean Cooper: 38:56

So it's the lesser of those two. So basically saying you can potentially do twice the annual limit. But realistically, that's only going to be if you didn't contribute anything in the prior year.

Chris Holling: 39:12

Right.

Sean Cooper: 39:14

But realistically, you can do the, your current limit plus the amount. If you didn't contribute your limit your full limit in the prior year, then you can, you can tack that on in the current year. So

Chris Holling: 39:32

okay,

Sean Cooper: 39:32

they give you a little bit more flexibility with the 457 B is what that really means.

Chris Holling: 39:37

Okay,

Sean Cooper: 39:37

if you have if you haven't kept it out every year, so and you're specifically if you're close to retirement.

Chris Holling: 39:46

All right. No, that makes sense. So tell me tell me about the weird stuff that stuck out to you then.

Sean Cooper: 39:51

So I was thinking of specifically Some other retirement accounts that are less commonly used that a lot of people are not necessarily familiar with. And those would be seps, and simples. So simplified employee pensions and savings incentive match plan for employees. The reason a lot of people aren't necessarily familiar with them is because they are more common for small companies, or even business owners of small companies.

Chris Holling: 40:28

Cool, what what are they? I have no idea. Honestly, I've never even heard of these things before.

Sean Cooper: 40:33

Okay, so sep the simplified employee pension with that one, as opposed to the employees making contributions, and then the employer doing a match like you do with most 401 K's 457 and 403, B's and all that stuff. It is only the employer that makes the contribution employees do not make any contributions whatsoever.

Chris Holling: 40:59

Okay,

Sean Cooper: 41:00

the cap is the same. It's still the 57,000. But it all comes from the employer.

Chris Holling: 41:08

Okay,

Sean Cooper: 41:09

so it's, it works out very well for self employed people.

Chris Holling: 41:17

Yeah, absolutely.

Sean Cooper: 41:18

Yeah. Because it gives them much higher cap that they can work with. And they're not dealing with some of the administrative expenses that are expenses that are tied to 401, K's and all those others?

Chris Holling: 41:31

Well, then in theory, you're you're running your own business, and it becomes part of your business expenses that you are putting towards retirement that then that way the the business expenses are tax deductible when you run your numbers for the business at the end of the year.

Sean Cooper: 41:47

Right. Yeah. So any any contributions to retirement accounts are going to be from a business standpoint are a an expense on the business end? So it's going to be a tax deduction? Absolutely.

Chris Holling: 41:58

Well, that's cool point. And that's I'm sorry, that's for both or that's just for that

Sean Cooper: 42:03

that would be for both. I mean, really, any of the retirement accounts, contributions, employer contributions to retirement accounts are an expense for the business. So it's going to reduce the income associated with the business.

Chris Holling: 42:19

Is there any kind of cap on that? Like, is there a limitation of how much say I run a business? And I want to contribute to that? Can I only do a certain amount of that?

Sean Cooper: 42:29

Yeah, that was that 57,000?

Chris Holling: 42:31

Oh, okay.

Sean Cooper: 42:32

They put another a couple other limitations on it. It can it's, it's capped out at 25% of employee income. So you can't put 100% of your income in there. There's a 25% cap. And it only applies to the first 285,000 of employee income, which, you know, that math works out.

Chris Holling: 42:56

Anytime that you say to me, the math works out on that I just, I trust you. I don't know if you think that I sit back here and I start checking your math, but I but I don't. I just want you to know that.

Sean Cooper: 43:07

I appreciate you. Actually 50.

Chris Holling: 43:14

See, I don't even need to do it. You check your own math.

Sean Cooper: 43:17

Yeah, it's actually only 20% of the 285. So yeah, so it's two separate limits that they put on that one, all the rest, they all the other retire. All the other employer retirement accounts. So business retirement accounts, they all have that 285 limit, so it's only on the first 285 of employee income that it can apply to but they they tack on that 25% cap as well for the Sep

Chris Holling: 43:51

I just love that when I when I make fun of you for getting distracted for you to go and crunch numbers somewhere. You don't even know that I'm making fun of you and you're distracted and crunching numbers somewhere.

Sean Cooper: 43:59

Oh, I know. I just don't care

Chris Holling: 44:00

It warms my heart. Okay, okay. Okay, well, then it's perfect.

Sean Cooper: 44:05

Because I'd still just as soon crunch the numbers. Yeah.

Chris Holling: 44:13

Well, I'm very happy for you.

Sean Cooper: 44:19

Alright, so yeah, the other one the simple. So savings incentive match plan for employees?

Chris Holling: 44:24

Yeah,

Sean Cooper: 44:25

that one is similar to like the 401. K's in those in that there's an employee contribution and an employer contribution. Employee max maximum contribution is 13,500 instead of 19,500 so it has a lower cap on it. And then if you know the plus another 3000, if you're over age 50. Where it really differs is in terms of the employer match. It's basically set you can't there's really no flexibility with it. You have two choices. As an employer, either you do a 3% match. And you can adjust that down to down for, I think two out of five years if you need to. But for the most part, it's it's 3% and set it and forget it 3% match or a compulsory 2% contribution. And

Chris Holling: 45:26

okay,

Sean Cooper: 45:26

so the difference between those is the 3% match. As an employer, they only have to put in that 3%. If you as an employee, make a contribution. So they're, it's, it's literally a match, they are only putting it in if you put it in. Whereas the 2%, it's a smaller amount, but they have to put it in whether the employee puts anything in or not.

Chris Holling: 45:51

Right. Okay. And then can you if you were part of that simple plan, like the band? If you are part of the simple plan, then it would you be able to choose, say, per month, if you were contributing? Or is that something that you have agreed upon when you sign the papers for this small business owner employer that you're working with?

Sean Cooper: 46:16

Right, so it's gonna be similar to your, are you talking about as an employee?

Chris Holling: 46:23

Yeah,

Sean Cooper: 46:24

yeah. So it's gonna be similar to your, your 401, K's and those where, you know, you basically, when you first sign up your paperwork and you know, every year, you have a window where you can basically say, Hey, I'm going to contribute X percent of my income

Chris Holling: 46:42

K.

Sean Cooper: 46:42

Yeah,

Chris Holling: 46:43

yeah, that makes sense. I was just curious if it was flexible, say like, a month to month contribution, or however that

Sean Cooper: 46:48

no, nope no, the really the only windows they open up for that are on an annual basis. And then if you have major changes in your your life, like you got married, you had a kid? Yeah. Yeah, it's kind of the same with the health insurance and all that jazz.

Chris Holling: 47:06

Interesting. And so the the same thing with with all these other plans, then even through these smaller business, one the the SEP and the SIMPLE that you're, you're looking at,

Sean Cooper: 47:16

kind of except the sep, there is no employee contributions. So you're not you're not really collecting anything.

Chris Holling: 47:23

Right. But that's that's not what I was getting at the that in all of these if you were to try and utilize pulling the money out before the 59 and a half.

Sean Cooper: 47:33

Oh,

Chris Holling: 47:34

mark.

Sean Cooper: 47:34

Yeah,

Chris Holling: 47:35

they would all they would all take a hit

Sean Cooper: 47:37

Correct

Chris Holling: 47:37

In every one of these examples.

Sean Cooper: 47:38

Yeah, IRAs, 401, ks 457, simple seps, all of them, they have that 10% penalty. It's basically the IRS saying, Hey, we're getting giving you some kind of tax advantage for saving for retirement, you have to actually save it for retirement. If you pull it up before then we're, we're taking the tax advantage away, and we're throwing a penalty in there on top of it.

Chris Holling: 48:02

They're kind of like the mob man. I, I offer you this gift, the best gift I could on the day of my daughter's wedding, and you take it and you take it from me when I tell you, you can't have it until this later time. You take it sooner and against my permission, and now you will pay you will pay 10%

Sean Cooper: 48:26

That was good.

Chris Holling: 48:27

Um, well, if I'm starting to do impressions, maybe it's time to put a bow on it. All right. Well, I think that's a that's a solid, solid hit on everything as far as just kind of generally getting the idea of of different not not only retirement plans, but but generally retirement plans is kind of what we're looking at.

Sean Cooper: 48:49

Right.

Chris Holling: 48:50

And I think it's a good broad strokes thing, which is kind of what we're good at is good broad strokes

Sean Cooper: 48:55

you want me to sum'er up, sum'er up. Or you want to sum'er up.

Chris Holling: 48:59

I am interested to see how you do. Tell you what, I'll give you some backing music while you while you sum it up. Ready, go ahead. I got you

Sean Cooper: 49:12

What's the back?

Chris Holling: 49:13

You're fine. It's fine. I got you

Sean Cooper: 49:15

I'm not prepared for this music that

Chris Holling: 49:17

you don't have to be prepaired

Sean Cooper: 49:17

Just feels like pressure. Okay? No. So qualified versus non qualified, non qualified are your individual and joint accounts. There's no tax advantage to them, but they're also no restrict that is obnoxious. But there's also n restrictions in terms of ho much you contribute and how muc you can take out. Qualifie accounts can basically be a least on the retirement side ca be broken down in between you what you can do on an individua basis and what you can do wit your employer and those can b further broken down into whethe they are defined contribution o defined benefit defined benefi is exactly what Sounds like i defines how much you get i retirement either when yo retire on that date, or what yo get every year, for the rest o your life, defined contributio defines how much the company i going to contribute on you behalf, how much it grows to an what you do with it after tha is up to you. From there, yo have your IRAs, which are you individual retirement agreement 6000 to 7000, that you ca contribute there. And then the have some limits in terms of yo know, whether it's ta deductible or not. 401, K's hav much higher limits. Mor restrictions from the employer side, but that's where you al o get your matches and can th ow in profit sharing and th ngs of that nature. And you ha e seps, and simples, which ar kind of like the what they so nd, there's simplified ve sions of your your bigger co pany retirement accounts.

Chris Holling: 50:59

Absolutely,

Sean Cooper: 51:00

the only other big difference is traditional versus Roth. Traditional results in a tax deduction in the year you make the contribution, it grows tax deferred, it's all taxable, when you pull it out, Roth, no tax benefit in the year you make the contribution, it does grow tax deferred, and it's all tax free, when you pull it out, all of them result in a penalty if you pull them out, prior to age 59 and a half. And when I say all of them, I'm referring to the qualified plans, not the non qualified.

Chris Holling: 51:31

Right?

Sean Cooper: 51:31

How was that?

Chris Holling: 51:32

And no, it was great. Honestly, and, and really just like anything that we say, and in any of these, that this is very much a it's important to to learn these things and learn the differences like I clearly did today, because I I thought I knew more than I do. And I was so very, very wrong. That's totally fine. And I, I'm pleased to to go over. So thank you, Sean, for explaining those things to me, because I, I was I was blind, more blind than I knew I was. And, and like any of these things, I think it's important for everybody to to go over these things and find out what is important to them and important to important to your lifestyle, and what helps you the best. And maybe maybe there are some options in here that you came across that you didn't even know were a possibility, and worth looking into. And that's that's what we try to take the time to, to evaluate and just see what these different new possibilities are and making sure that you're making the best decisions that you can. We're actually nearing the end of this season, believe it or not, I think I think we might touch on one, maybe maybe a couple more episodes before we wrap up the season. And then this next season, we'll be able to dip into some some complicated stuff, which when I don't understand the simple stuff, I can only imagine how how that's gonna go. But you know, that's, that's Alright, the next season is when we we can actually start looking at some of that. Is there anything that you want to add to this to this stretch?

Sean Cooper: 53:08

No, I, I would say that, as you pointed out this, there are so many types of accounts. And it's all all the tax ability. And the tax advantages of it are written in IRS jargon. So if you have questions on it, reach out to your accountant, reach out to your advisor, reach out to us, hit us up on Facebook and ask us questions. We're happy to help. You know, if it's something we get a lot of, maybe we end up doing an entire podcast that's dedicated just to 457 plans or just two seps and SIMPLEs. You know, and hopefully, we'll come back and do a college savings one as well. So let us know we're we're happy to answer your questions. Because I know it is confusing. And I spend more time than I would ever like to on the IRS website trying to unravel what it is they're they're trying to say.

Chris Holling: 54:01

So that you don't have to

Sean Cooper: 54:03

Yes, exactly. Well, and also keeping up with it. Because all the numbers that I just shared with you the 19,500 for the cap on the 401K's and the 403 B's and four oh 57s and all that stuff. It changes every year. So I typically don't try to memorize those things, because it's always changing. Those are the types of things that I look up myself because I'm like, committing it to memory is almost a waste of time in my mind.

Chris Holling: 54:32

Yeah,

Sean Cooper: 54:32

yeah. And even those limits on whether or not you can contribute to a Roth IRA those change every year as well. So, yeah,

Chris Holling: 54:42

absolutely. And really just just like he's saying, reach out to us. do your own research, do both tell us to, to express the best way to do your own research. We'll, we'll meet you wherever we can. And really more than anything, we're just happy that you're here and taking the time to listen and like we like like to say, thank you for being out here and taking the time to make sure to try and better yourself. Because I feel like so few people do anymore. And thank you for taking the time to listen to us. So welcome back. Thanks for listening to the truth about investing back to basics. My name is Chris Holling.

Sean Cooper: 55:19

And I'm Sean Cooper.

Chris Holling: 55:22

And we will catch you on the next episode. What whatever that is because we don't have a plan yet and that's fine. How did you did you like my backing music? I thought it was perfect. You know, you didn't like my backing music.

Sean Cooper: 55:36

No

Chris Holling: 55:42

podcast disclaimer disclaimer. The disclaimer following this disclaimer is the disclaimer that is required for this podcast to be up and running and fully functioning and moving forward. This is going to be the same disclaimer that you'll hear each one of our episodes. We hope you enjoy it just as much as we enjoyed making. All content on this podcast and accompanying transcript is for informational purposes only. opinions expressed here in by Sean Cooper are solely those of fit financial consulting LLC unless otherwise specifically cited. Chris Holling is not affiliated with Fit financial consulting LLC. Nor do the views expressed by Chris Holling me, again, represent the views of fit financial consulting, LLC. This podcast is intended to be used in its entirety. Any other use beyond the author's intent distribution or copying of its contents of this podcast is strictly prohibited. Nothing in this podcast is intended as legal accounting or tax advice. And is for informational purposes only. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. This podcast may reference links to websites for the convenience of our users. Our firm has no control over the accuracy or content of these other websites. advisory services are offered through fit financial consulting, LLC, an investment advisor firm registered in the states of Washington and Colorado. The presence of this podcast on the internet shall not be directly or indirectly interpreted as solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute follow up or individualized responses to consumers in a particular state by our firm in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption for information concerning the status or disciplinary history of a broker dealer, investment advisor or other representatives. A consumer should contact their state securities administrator Amen. Circle,

Sean Cooper: 58:20

square,

Chris Holling: 58:21

triangle,

Sean Cooper: 58:23

octagon

Chris Holling: 58:24

ooh. Hexagon

Sean Cooper: 58:30

Sure.

Chris Holling: 58:31

Well I was starting to think about like septuplets and sextuplets and then I was like sexagon and I was like that's that's not right.

Sean Cooper: 58:39

No, no. How about heptagon or a nonagon?

Chris Holling: 58:43

Right right well that's right that's that's what that makes sense. But just sexagon sounds like all right. All right. Let's shoot for a one liner one liner. I decided to sell my vacuum cleaner. It was just gathering dust. That has always kind of bothered me though that like no matter the circumstance, or maybe it's it's encouraging bothers me. I don't know that. Whether a vacuum works or it doesn't it sucks either way. You ever thought about that.

Sean Cooper: 59:30

bothers ya hu. Really eating at you?

Chris Holling: 59:35

Well, I couldn't tell you a joke about pizza but it's a little cheesy.

Sean Cooper: 59:38

Yeah.